Risk Management and the Financial Crisis: Case of Northern Rock

By

ACKNOWLEDGEMENT

I would like to thank my supervisors, friends and family, without their support this research study would not have been possible.

DECLARATION

I adjudge that the entire content of this dissertation is entirely my own work; the content used in this dissertation has not been submitted before in any educational institution and represents my own opinion.

Signed __________________ Date _________________

ABSTRACT

In this research study, the study focuses on the financial crisis that began in 2007. The purpose of this study is to investigate about financial turmoil period. The study investigated how this financial crunch has affected the UK banks especially Northern Rock bank. The study not only investigated this but also found the risk management issues and processes for avoiding the chances of major losses and bankruptcy. The study analyzed the case of northern rock bank UK. The qualitative secondary research study was employed in which the case study method was used. Thus it can be concluded that the financial crunch has affected US as well as UK banks and northern rock bank is one of those banks which have been also affected. Now, many risk management techniques are being used for its recovery.

TABLE OF CONTENTS

ACKNOWLEDGEMENTii

DECLARATIONiii

ABSTRACTiv

CHAPTER 1: INTRODUCTION1

1.1 Introduction to the section1

1.2 Background of the study1

1.3 Problem statement4

1.4 Research Aims and objectives4

1.4.1 Aims4

1.4.2 Objectives4

1.5 Rational for the study5

1.6 Research Questions5

1.7 Scope and Limitation5

1.8 Dissertation Overview5

CHAPTER 2: LITERATURE REVIEW7

2.1 Introduction7

2.2 A review of financial crisis of 2007-087

2.3 Origins of the 2007 credit crisis8

2.4 Nature of the 2007 episode9

2.5 Liquidity vs. Solvency10

2.6 Risk Management12

2.7 The low-probability-high-impact (LPHI) risk12

2.8 Incomplete credit risk shifting13

2.9 Summary14

CHAPTER 3: METHODOLOGY15

3.1 Introduction15

3.2 Research Methodology15

3.3 Data gathering16

3.4 Case studies16

3.5 Grounded Theory17

3.6 Data collection methods17

CHAPTER 4: FINDINGS19

4.1 Introduction19

4.2 The Business Model20

4.2.1 Financial and Liquidity risk22

4. 3 Mortgage business23

4.4 Crisis Management29

CHAPTER 5: DISCUSSION AND CONCLUSION30

5.1 Introduction30

5.2 Risk Management30

5.3 Enterprise risk Management (ERM)30

5.4 Institutional structure of supervision31

5.5 Conclusion32

5.6 Recommendations33

REFERENCES34

APPENDICES38

APPENDIX 138

APPENDIX 242

CHAPTER 1: INTRODUCTION

1.1 Introduction to the section

In this study the financial crisis and risk management processes in the UK banks were discussed. The study focused on the risk management issues and process as well as the financial crisis of UK bank that is Northern Rock Bank in the United Kingdom (UK). This chapter starts with a brief introduction on the chosen topic as well as providing an outline of the chosen topic. Then a background to the research is laid out in which the researcher throws some light on the relevant concepts and issues of financial crises as well as risk management.

1.2 Background of the study

The housing crisis of 2008 occurred due to large reductions in demand that ultimately resulted in significantly decreased home values. Borrowers with poor credit and no equity in their homes simply walked away from their obligations and properties leaving the lender to contend with nonperforming loans and declining property values. Banks foreclosed on these properties and discounted the asking price to facilitate quick sales. The large amount of foreclosures on the market caused home values to drop ...